G.R. No. L-9692; January 6, 1958
COLLECTOR OF INTERNAL REVENUE, petitioner, vs. BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS COMPANY, respondents.

FACTS

Respondents Batangas Transportation Company (Batangas Transportation) and Laguna-Tayabas Bus Company (Laguna Bus) are two distinct and separate corporations engaged in land transportation, each with its own capital, books, fleets, management, and facilities before the war. After Liberation, they acquired 56 buses, dividing them equally. In March 1947, after the resignation of Laguna Bus’s manager, Joseph Benedict, manager of Batangas Transportation, was appointed manager of both companies by their respective Boards of Directors, establishing a “Joint Emergency Operation” with a shared main office to economize on overhead expenses. Under this arrangement, gross receipts and expenses were pooled, net profits were divided fifty-fifty, and each company prepared its own income tax return based on its 50% share and paid taxes separately. The Collector of Internal Revenue assessed deficiency income tax against the respondents, contending that the Joint Emergency Operation constituted a taxable joint venture or corporation under the Tax Code. The Collector initially assessed P54,143.54 but later, pending appeal before the Court of Tax Appeals (C.T.A.), increased the assessment to P148,890.14, claiming a credit error. The C.T.A. reversed the Collector’s assessment, holding that the Joint Emergency Operation was not a corporation, partnership, or association under the Tax Code.

ISSUE

1. Whether the Joint Emergency Operation organized by the two respondent transportation companies is a corporation within the meaning of Section 84(b) of the Revised Internal Revenue Code and thus liable for income tax under Section 24.
2. Whether the Collector of Internal Revenue, after an appeal to the Court of Tax Appeals has been perfected and jurisdiction acquired, may modify the appealed assessment by increasing it before filing his answer.

RULING

1. Yes, the Joint Emergency Operation is a corporation under Section 84(b) of the Internal Revenue Code and is liable for income tax. The Supreme Court, citing its prior decision in Evangelista v. Collector of Internal Revenue, held that an unregistered partnership or joint venture that engages in business for profit falls under the definition of a “corporation” in Section 84(b) and is subject to income tax as a corporation under Section 24. The Joint Emergency Operation, which pooled resources and operations to generate and divide profits, constituted such a taxable entity, separate from the individual respondent companies.
2. Yes, the Collector may amend the appealed assessment by increasing it before the Court of Tax Appeals, and the court may redetermine the assessment based on evidence. The Supreme Court ruled that pending appeal before the C.T.A., the Collector could amend the assessment and include the amendment in his answer, and the C.T.A. could then redetermine the tax liability based on the evidence presented.
3. Additionally, the Supreme Court held that no penalty surcharge should be imposed because the failure to file a return for the Joint Emergency Operation was due to a reasonable cause—an honest belief, based on advice from attorneys and accountants, that it was not a taxable corporation. Therefore, respondents are ordered to pay the reassessed amount of P148,890.14 minus the 25% surcharge.